Temporary Tax Laws Make Advising Clients a Tea Leaf Reading Game

Major provisions of the Tax Cuts and Jobs Act of 2017 are scheduled to expire at the end of 2025. Congressional action so far has only addressed those provisions that have already expired. This is exacerbating confusion over whether some, all, or none of the provisions will continue.

The failure to reach consensus on the more than 20 temporary provisions in the TCJA makes it almost impossible to evaluate whether they should be extended or modified. This isn’t from lack of transparency—the Joint Committee on Taxation publishes an annual list of expiring tax provisions—but because the number and complexity of expiring provisions is speeding up while the legislative decision-making process is slowing.

Let’s acknowledge that enacting and extending tax provisions, especially incentives, on a temporary basis is a long-standing and established practice. Sometimes there are good reasons to enact a temporary tax provision—to address short-term problems such as natural disasters or to coincide with spending programs that also have expiration dates, such as highway or airport trust fund taxes.

Other times, temporary tax provisions are designed for political and/or revenue reasons rather than for policy reasons. In these cases, the impact on taxpayers and tax authorities—both intentional and unintentional—must be addressed.

As a tax adviser, I often have to tell clients that a particular benefit is scheduled to expire on the date set in the statute. Even if the temporary provision has a track record of extensions, I must warn the taxpayer that it may not occur this time. “Everyone expected it to be extended again” is yet to be accepted as a valid defense to a legal malpractice claim.

Current practices, unfortunately, reward temporary tax provisions. If a lawmaker supports a change in tax law but determines that the revenue cost of a permanent change is too large for inclusion in pending legislation, the lawmaker has three possible approaches to reduce the cost.

One approach is to modify the proposal so that it has less revenue cost, allowing the provision to be permanent but possibly less effective.

Another approach is to push for the proposal in full but ensure that only part of its permanent cost is reflected in the relevant revenue-estimating window. One way is to adopt a delayed effective date, which allows the full provision to be permanent but risks that the delayed effective date may continue to be postponed or even repealed.

The remaining approach is to enact the full provision for a limited period. Historically, this was a disfavored approach because it required supporters to fight the same revenue battle a short time later.

What was once unpopular is now popular. The sheer number of expiring tax provisions, and the attitude for dealing with them, have turned this into the most favored way to deal with this problem. The provision inevitably gets extended, perhaps retroactively or right before expiration, for another short period of time.

One could argue that the frequency and regularity that this happens is proof the system is working. While it may be the solution to a particular problem, it’s part of a bigger problem.

The practice of last-minute resuscitation of expiring (or expired) tax provisions is ill-suited for the terminations and deferred changes in recent budget reconciliation bills. It’s frequently unclear whether a particular change in law is policy-based or designed simply to meet a revenue target in a budget reconciliation bill. Provisions in reconciliation bills lack identifying labels. So, what is up for extension is in the eye of the beholder.

The pressure and rewards for enacting temporary tax provisions aren’t going away, but Congress (and proponents of certain provisions) must recognize that they have costs as well as benefits. It seems that only the benefits, and not the costs, are being acknowledged.

Much of the debate when Congress takes up the TCJA’s expiring provisions expiring and changing as a matter of law at the end of 2025 will be about “fairness” and “competitiveness.” Regardless how “fair” or “competitive” any particular provision may be, stuffing a bunch of tax provisions that may or may not expire or change by operation of law makes the federal tax code neither fair nor competitive for those subject to it.

What to do about major TCJA provisions that are scheduled to expire (such as individual rate reductions), revert to prior law (such as rules for deductibility of taxes and other expenses for individual income tax purposes), or become less favorable (deduction of research and experimentation expenses and interest expense limitations, among others) isn‘t easy to answer.

Procrastinating or temporarily extending effective dates doesn’t make the ultimate decision any easier. But it does make the lives of taxpayers harder. There likely won’t be a cure any time soon for the malady of temporary tax provisions.

But it’s only fair—and competitive—to ask for timely treatment when it does occur. No doctor would recommend waiting to offer treatment until just before, or even after, the patient has expired.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

John Harrington is co-leader of Dentons’ US tax practice and advises on transactional and compliance issues, international tax matters, and domestic tax issues.

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